Tuesday, February 12, 2008

I hate adjustable loans; they provide zero piece of mind and I don't think people really understand them (including many brokers who sell them). Of course what would you expect when the mortgage industry was recruiting people to sell them with no formal education or experience required? Whenever I've taken out a mortgage or a home equity line, it seems that I end up knowing more about the process than the banker or broker and have to give them instructions -- of course it helped that when in college I temped as a loan processor for awhile -- but seriously, it's really not THAT complicated. Scary, huh?

Now it seems that all types of adjustable loans may be in peril, in large part because people don't like the feeling of making payments on a depreciating asset (like they do on their cars, but that's another story), and many borrowers were so eager to get into a booming market that they simply didn't care if they could afford future resets. So will the government jump in to save people from their own stupidity? It certainly looks like it. From a New York Times story:

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists...

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit...

The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years...

The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.

Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

For borrowers in trouble, it's a good thing this is happening in an election year -- and one in which the Republican establishment will be under pressure to show some sympathy -- however potentially misplaced and to match the Democrats -- to borrowers who signed for loans they knew they could not afford and thought crossing their fingers would make it all better.